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Paul Krugman writes in today’s New York Times:
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.
But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.
We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.
I agree. Although it doesn’t absolve the millions of Americans who got mortgages which they did not understand for houses which they could not afford, using a system of valuation rigged to artificially pump up prices… the bulk of the blame has to be liberally heaped on the previous Fed chairman.
He poo-poo’ed repeated concerns about derivatives and who refused to acknowledge a full-blown real estate bubble even as it inflated under his nose.
Of course, now he not only agrees that there is and was a bubble, he now even calls it by that name and goes as far as calling it a “global housing bubble”. But just to be clear, it isn’t his fault in any way whatsoever.
Retirement does wonders for the brain.
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